Since 1904, Panama has used U.S. Dollar notes (paper money) as domestic currency 1 Balboa US 1

No Central Bank, No Centralized Foreign Reserves.

Government-owned Commercial Bank Banco Nacional de Panama.

Capital Account (KA) is entirely open and banks are free to invest excess funds in Panama or abroad.

Foreign Banks, mainly US banks have been de facto Lender of Last Resort.

Panama experienced solid Macroeconomic Performances with 3 average inflation per year in 196197.

Growth averaged 8.1 from 1961-71 and from 1978-81. For other years 2.5 average.

16

Panamas Experience with Official Dollarization Legacy of a Century (continued)

Real interest rates have remained in low-to mid-single digits and,

Nominal interest rates were also very low comparing to other Latin American countries.

Long-term Domestic Credit Panama is the ONLY Latin American country where 30-year fixed-rate mortgages are available in domestic currency.

Real Exchange rate has shown little variations comparing to other Latin American countries.

The Panamanian Government and Banco Nacional de Panama have NOT rescued failing banks. But few banks have failed over past 30 years.

17

Panamas Experience with Official Dollarization Legacy of a Century (continued)

All major shocks to the Panamanian Economy were NOT related to the Monetary System

Canal Zone crisis in 1964, 1967-69

Oil Shock in 1973, 1979

Latin America Debt Default in 1982

Crisis immediately preceding and during the embargo and the U.S. invasion 1988-89.

All caused a withdrawal of Domestic Deposits and Economic Dislocations. But Private Banks responded rapidly and adjusted their portfolio by selling assets abroad and increasing domestic credit despite the outflow of domestic deposit

18

Conclusio n

Dollarization does have benefits

Stable prices and interest rates

Increased confidence in domestic economy

Increased international trade due to reductions of transactions costs.

Testimony Dollarization in Emerging-Market Economies and Its Policy Implications, Joint Hearing of the Subcommittee on Economic Policy, Subcommittee on International Trade Finance, Committee on Bank, Housing Urban Affairs, US Senate, April 22, 1999.

Dollarization Will the Quick Fix Pay Off in the Long Run, Myriam Quispe-Agnoli.

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